Netflix turns on the TV

For all the head-scratching and chin-pulling over Netflix’s decision to separate its DVD and streaming businesses, one important aspect of the move has gone largely overlooked: the effective separation of its movie and TV content businesses, which splits the company along content lines. While that may not have been the main intent behind the move, it’s likely to have significant consequences going forward, both for Netflix and for the content owners.

Speaking at the Paley Center International Council media conference in Los Angeles last week, Netflix chief content officer Ted Sarandos noted that “at its peak,” TV content accounted for 18 percent of total viewing on DVD for Netflix. In contrast, TV content “is approaching 60 percent” of total viewing on Netflix’s streaming platform (archived video of the session is here and worth watching in full).

Today, with the decline in popularity of TV on DVD generally, TV content probably represents somewhat less than 18 percent of total viewing on DVD for Netflix, meaning it skews more heavily toward movies than it did a few years ago. At the same time, it seems clear from Sarandos’ comments that TV content is still trending upward on Netflix’s streaming platform and may ultimately surpass 60 percent of total viewing.

In other words, Netflix’s streaming business is becoming more like Hulu — an over-the-top TV channel — while its DVD business is becoming more like Redbox — a low-priced movie rental service. By separating DVDs from streaming, therefore, Netflix essentially is splitting itself along content lines.

As movies shrink as a percentage of total viewing on the streaming platform, the movie studios more and more will be consigned to the DVD side of Netflix’s business. That’s significant because the movie studios and TV networks, increasingly, have very different views of the company.

To the movie studios, Netflix is a cancer on the business. They blame Netflix’s subscription rental model for undermining DVD sales and for largely wiping out à la carte DVD rentals, which are more profitable for the studios. About the only action left in à la carte rentals these days is through Redbox’s dollar-a-night kiosks. Worse, from the studios’ perspective, Netflix’s all-you-can-eat streaming model has helped strangle the more profitable pay-per-view streaming business in its cradle.

The TV networks, however, have a much sunnier view of Netflix. They’ve discovered that Netflix can add significant incremental value to the TV business by creating a new market for serialized TV content that is difficult to syndicate, and by driving up prices for first-run series by competing with the likes of HBO and Showtime for exclusive original content.

For Netflix, then, separating the streaming and DVD businesses has the effect of separating out its vendors into those that are anxious to work with it and those who would rather not. That consigns the later group to a re-branded, increasingly noncore part of its business.

The separation also makes it easier for Netflix to focus where it spends its money, an effect that is already playing out. On Wednesday, Netflix announced a new, expanded streaming deal with Discovery Communications, giving it access to popular TV series such as Man vs. Wild and How It’s Made. Just three weeks ago, it walked away from a movie-heavy streaming deal with Starz.

At the time, Netflix CEO Reed Hastings noted that “Starz content is now down to about 8% of domestic Netflix subscribers’ viewing . . . [and] we expect Starz content to naturally drift down to 5–6% of domestic viewing in Q1.”

Ultimately, of course, the fate of Netflix will depend on how consumers respond over time to its shifting strategy, not how it deals with its vendors. But in the meantime, where it spends its money and where it looks for growth will impact everyone in the movie and TV value chains.

Question of the week

Should Netflix look to sell its DVD business?
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Paul Sweeting

Principal Concurrent Media Strategies

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